Tuesday, April 24, 2012

Four Defensive Stocks for a Market Pullback: MCD, MO, CAG, JNJ

If you looked at just the first-quarter results you could be forgiven for thinking that everything in the stock market is rosy.

The Dow Jones Industrials and the S&P 500 turned in their best performances since 1998, rising 8.14% and 12.0%, respectively.

Meanwhile, the Nasdaq was even stronger, riding a tech-stock rally to a gain of nearly 19% - its best yearly start since 1991.

But as every seasoned investor knows, the markets never go straight up or straight down.

Prospects for continued strength may seem bright, but the recent five-day slide that took the Dow down almost 550 points might be pointing to something else entirely.

That's why now is the perfect time to consider shifting at least some of your funds into "defensive" stocks.

How to Shop For Defensive Stocks

The following criteria generally describe defensive stocks:

  • Those in non-cyclical industry groups, meaning they are capable of maintaining or increasing their revenues and earnings regardless of whether the overall economy is growing, flat or even slumping.
  • Companies that provide products or services in fairly constant demand, even when the economy slows. Examples include producers of consumer staples; food packagers and distributors; healthcare and pharmaceutical companies; suppliers in certain addictive "sin" markets, such as tobacco and alcohol; and essential utilities.
  • Those that have a recognizable brand name (or names) that consumers look for first, even when times are hard and cash is short.
  • Stocks that pay steady - and historically increasing - dividends, which can provide both income and a cushion against short-term drops in share prices.
  • Stocks with below-average volatility (beta) relative to the overall market, or a negative correlation with the primary business and/or market cycles.
  • And companies that have at least some international exposure, providing access to emerging markets that offer growth even when developed nations may be struggling.  (more)

Bracing for Bondageddon

by Kathy A. Jones, Vice Pres­i­dent, Fixed Income Strate­gist, Schwab Cen­ter for Finan­cial Research
Key points:
  • Dire warn­ings about an immi­nent spike in bond yields have been mak­ing the news lately, but we believe some of them are overly dramatic.
  • Nev­er­the­less, inter­est rates clearly have more room to rise than fall, and as the econ­omy recov­ers, rates are likely to move higher.
  • In our view, investors should man­age their bond port­fo­lios to mit­i­gate the risk of ris­ing rates, rather than aban­don­ing the asset class altogether.
  • You can try to lower interest-rate risk by reduc­ing the aver­age matu­rity of bond hold­ings, using lad­dered port­fo­lios and focus­ing on higher-coupon bonds.
"Bondaged­don" now?
Dire warn­ings about the com­ing col­lapse of the US bond mar­ket have grown in fre­quency and vol­ume over the past two years. Some of these warn­ings have come from very promi­nent voices: War­ren Buf­fett was quoted say­ing that bonds are "dan­ger­ous" and "should come with a warn­ing label," while Pro­fes­sor Bur­ton Malkiel of Prince­ton sug­gested in aWall Street Jour­nal edi­to­r­ial that bonds are no longer appro­pri­ate for "pru­dent" investors.
We believe warn­ings like these are dan­ger­ous and impru­dent because they may lead investors to aban­don diver­si­fied port­fo­lios and unwit­tingly take more risk. Let's put the sit­u­a­tion into per­spec­tive: Bond yields have been falling for more than 30 years. The 1.8% low in 10-year US Trea­sury yields reached at the end of Jan­u­ary may be the low­est level we see for a while. How­ever, the "spike" in rates from those lows has been pretty modest.
Ten-Year US Trea­sury Yields Trend Steadily Downward
Ten-Year US Treasury Yields Trend Steadily Downward
Source: Bloomberg, as of March 29, 2012.
In our view, cur­rent eco­nomic con­di­tions don't point to a risk of a sig­nif­i­cant increase in rates in the near term. Although the US econ­omy has shown signs of stronger growth, Europe has tipped into reces­sion and lead­ing indi­ca­tors for some major emerging-market economies such as China and Brazil are slow­ing. As a result, cen­tral banks around the globe have been low­er­ing inter­est rates. Infla­tion pres­sures have actu­ally eased since late last year despite the recent rise in energy prices. Finally, we see longer-term demo­graph­ics point­ing to ris­ing demand for fixed income as the pop­u­la­tion ages.  (more)

Crocs starting to show signs of life again and resistance may give way

Crocs (NASDAQ:CROX) – This stock is starting to show signs of life again. Besides an interesting top-line growth story on the back of turning the company into an actual shoe manufacturer, the chart has stabilized.
After falling off a cliff in October 2011, the stock stabilized and found support in the $14-$16 range. CROX then put in a breakaway gap on Jan. 11, which gave way to a move into the high teens/low $20 range where it has been consolidating for a couple of months. The $22.50 area has served as resistance since late March, but looks to have potential to give way to a first stop near $24 if it breaks.
A partial starter long position here with a price target at $24 and a stop at $21 looks like a good setup. The stock has a beta of 1.27 versus the S&P 500. Should the broader market bounce and retest the 2012 highs, this may allow for some alpha to be generated with the stock.
The company is scheduled to report its Q1 earnings on April 25 after the close, and as such, any long positions in the stock are subject to potential severe price movement if the news is not as expected.
Trade of the Day – Crocs (NASDAQ:CROX)
Click to Enlarge

Car Sales, Gasoline and Demographics

It's no secret (at least it shouldn't be) that gasoline sales have plunged. Here is a chart from my April 6 post Another Plunge in 3-Month Rolling Average of Petroleum and Gasoline Usage for Jan, Feb, March 2012
Jan-Feb-March 2012 petroleum and gasoline usage vs. the same three months in prior years.
click on chart for sharper image
Every month for quite some time, the rolling average of petroleum and gasoline usage has been trending down. The question is "Why?" Some pin this on car mileage improvements but that answer is easy to discredit. Fuel efficiency has been rising for more than a decade, but the plunge did not start until the Great Recession in 2007.
However, the Great Recession is over, yet gasoline sales have not rebounded. Is this an indication another recession is on the horizon? That the recession never ended? Something else?  (more)

These Three Companies Are In 'Full Scale Collapse' And Are Never Going To Recover

Whitney TilsonWhitney Tilson was just on CNBC talking about how investing in BP — and other stocks in free fall — are great value buys.
But Tilson said that he would avoid three companies that have been selling off sharply this week because he doesn't see a cap to their downfall.
Those companies are Nokia, Research in Motion, and First Solar. Tilson is short all three.
"This week, Nokia, RIMM, First Solar are all in the headlines. The businesses are in full scale collapse," Tilson said. "The stocks are down 60 to 80 percent, yet we are short those three companies because we don't think their businesses will stabilize. We see lots more bad news coming. So the key is you have to invest in businesses that are at least going to stabilize their operations and the bad news will fade. If the bad news continues you're in a value trap."
Issues at Research in Motion and Nokia have widely been discussed over the past few years. Mainly, since the launch of the iPhone, Apple (and to a great extent Google) has eaten their lunch.
The two have bet their businesses on new product launches: at Nokia it's the Windows powered Lumia and at RIM it's the upcoming Blackberry 10 OS.
But First Solar, once a darling of the green energy industry, has seen sales collapse as highly subsidized markets like Germany have seen government funding cut.
First Solar this week said that it would cut its workforce by some 30 percent, eliminating 2,000 positions across the company's global operations.
The solar giant plans to close all of its operations in Frankfurt, Germany and indefinitely idle some production lines in Malaysia, adding to reductions already taking place in Europe and the U.S.

Top 4 Things Successful Forex Traders Do

Trading in the financial markets is surrounded by a certain amount of mystique, because there is no single formula for trading successfully. Think of the markets as being like the ocean and the trader as a surfer. Surfing requires talent, balance, patience, proper equipment and being mindful of your surroundings. Would you go into water that had dangerous rip tides or was shark infested? Hopefully not.

The attitude to trading in the markets is no different than the attitude required for surfing. By blending good analysis with effective implementation, your success rate will improve dramatically and, like many skill sets, good trading comes from a combination of talent and hard work. Here are the four legs of the stool that you can build into a strategy to serve you well in all markets.

Leg No. 1 - Approach
Before you start to trade, recognize the value of proper preparation. The first step is to align your personal goals and temperament with the instruments and markets that you can comfortably relate to. For example, if you know something about retailing, then look to trade retail stocks rather than oil futures, about which you may know nothing. Begin by assessing the following three components.